JNU 2005

[Anjali]

If the short run avg cost for a firm is a decreasing function of its output over a certain range , then in that range
1. Firm's MC curve must also be decreasing
2. MC will lie below AC assuming that output is plotted on the horizontal axis and the costs are on vertical axis
3. The location of MC is uncertain since it depends on whether the firm is competitive or not
4. MC will lie above the AC , assuming that output is plotted on the horizontal axis and the costs are on vertical axis

[Arushi :))]

I go with option b.
Again using that diagram.
Firm's MC might not be increasing, in fact in that range, MC is first decreasing and then increasing, so a cant be the answer.
If the firm is competitive , then we use same set of AC and MC curves, that are U shaped( in short Run), and if it is a monopoly then also over the declining range of AC we use the same curves only,so If it is monopoly/ perfect competition , In both cases there is uncertainty.
So, i neglect option c.
Now if we have two possibilities :
either, we have linear cost curve, where AC= MC, that has to be ignored.
In the U shaped set,
Over the range, where AC is declining , MC lies below AC, so i go with option b.
Whats your take?

[Arushi :))]

[Anjali]

Well option b seems correct to me. But Iam a little confused with option c. In standard Monopoly diagrams we take MC to be an upward sloping linear curve. And AC is is u-shaped. So in such a case , curves pattern would be different from that in the competitive case. Just let me know where Iam going wrong :-p